The Tilted Playing Field

By James Kwak

It’s been widely noted that financial reform is now entering a new phase as the action moves from Congress to the regulatory agencies that will write the hundreds of rules necessary to implement the reforms. During the congressional fight, the financial sector had a huge advantage in money and lobbyists, but we had one advantage: the fact that there was (from time to time) a lot of media coverage, and Congressmen care at least a little about public opinion.

In the rule-writing phase, the banks still have a huge advantage in money, lobbyists, and lawyers–and are hiring as many ex-regulators as they can to press their case. As our friend Jennifer Taub writes at The Pareto Commons:

What lies ahead, over the next year and beyond, will require far larger armies of lawyers, economists, finance experts and just plain able bodies and minds to monitor and influence the rulemaking process. Rumor has it that one bank alone plans to set up 100 teams of employees, tasked with particular rule makings. And that is just one bank.

Unfortunately, however, the pressure of the public spotlight is largely off, tilting the battlefield in favor of industry.

Our best hope is that the people in the regulatory agencies really do want to do the right thing, which is quite possible for people like Gary Gensler and Sheila Bair, and soon we’ll have John Dugan out of the OCC. This is a big reason why we don’t need neutral arbiters as the heads of these regulatory agencies–we need real advocates who will take the side of ordinary people and the real economy against a financial sector that is still too big and too predatory.

Yes, this is code for Elizabeth Warren, but it’s not just about Elizabeth Warren. The regulators in all these agencies should realize that they are going to spend the next two years fighting against the Wall Street banks and their legions of lobbyists. If they do their jobs right, they will never work in the financial sector again (except maybe at a hedge fund or a buy-side investment consultancy). And if they’re not up for that fight, we need someone else who is.

144 responses to “The Tilted Playing Field

  1. Wish I could believe Elizabeth Warren isn’t just another careerist in granny glasses. I can’t. The public has the same chance with financial reform it has after one of those ‘tax reform’ bills, the only result of which is ten thousand pages of regulations gutting the substance of any reform making its way into the bill accompanied by trumpets from Democratic committee chairmen. Our best hope is now for an inflation that will validate all the toxic debt no longer marked to market. Of course, that will plunder all those who saved, acted prudently, and now accept the zero returns offered to non-banks by the Fed and the Treasury.

    Any day now the suckers will be plunging back into equities. All who follow the news know we are experiencing a strong corporate recovery. Those 4.5 million unemployed (and the 5 million more they have figured out how not to count) may find their best chance as day traders.

  2. If you thought the corrupt politicians were going to “reform” anything you were sadly mistaken. The reason they left out Fannie and Freddie was to protect their own personal piggybank. How many former Democrat big wigs have padded their personal fortunes at taxpayer expense working for Fannie and Freddie? How many “Friends of Angelo” worked on the “reform” package? The entire financial collapse is a scandal of historic proportions that the media continues to cover up.

  3. Great stuff. Appreciate the Taub link also.

  4. Currently, in finance, the mother of all regulatory agencies is the Basel Committee and their appendix the Financial Stability Board… Tell me, how do you intend to control them, when you insist on treating them so gently?

  5. What can we as private citizens do to keep the spotlight on the selection of regulators who would battle for the public good?

  6. “The Tilted Playing Field”

    Yes, this is code for … (to be continued)

  7. And who is going to “police” what goes on in the 2 years of transition from one “law” to another?

    Look at what has happened in the two years of “transition” to this next “transition”?

    We are a lawless state during “transitions”!

  8. I would guess you would keep an eye on the Senate Banking Committee and its counterpart in the House of Representatives. C-Span might be a good place, and I’m sure blogs like this one will at least keep us semi-posted. If your state’s Senator or Congressman is on one (a member) of these committees a phone call to their office during the hearings or just before the choices are made could be persuasive.

    List of Senate Banking Committee Members here:
    http://banking.senate.gov/public/index.cfm?FuseAction=CommitteeInformation.Membership

    List of House Financial Services Committee Members here:
    http://financialservices.house.gov/singlepages.aspx?NewsID=397

  9. “In 1969, a 14-year-old Beatle fanatic named Jerry Levitan snuck into John Lennon’s hotel room in Toronto and convinced him to do an interview. 38 years later, Levitan, director Josh Raskin and illustrators James Braithwaite and Alex Kurina have collaborated to create an animated short film using the original interview recording as the soundtrack. A spellbinding vessel for Lennon’s boundless wit and timeless message, I Met the Walrus was nominated for the 2008 Academy Award for Animated Short and won the 2009 Emmy for ‘New Approaches’ (making it the first film to win an Emmy on behalf of the internet).”

    http://www.youtube.com/user/imetthewalrus

  10. @ Jake
    re: “All who follow the news know we are experiencing a strong corporate recovery.”

    Yes, all those lay-offs and a massive pool of cheap labor (the nearly 20% unemployed) have been wonderful for corporate profits. In fact, many Wall Street types are not at all concerned by what they regard as manageable unemployment rates. And yet, the markets will drown in their own fraudulent muck soon enough. Actually, the exact same can be said about the government and their ‘stats’ and ‘reports.’

  11. It is understandable to see the cynical reaction to this post but I am sure there are far more than 10 good people out there working in regulatory positions waiting for someone who is not afraid or corrupt to encourage them and insist they make a difference.

  12. Bill Gilwood

    Nowadays good people are probably screened out in the hiring process, which is controlled by political appointees and financial industry hacks.

  13. Lavrenti Beria

    I wouldn’t waste your time, Ohio-Papa. What we as private citizens can do apart from demonstrating and striking is nothing, zilch. The most profound problem we face today is that good people will remain foolishly hopeful in the teeth of the theft of their democracy by these filth. The key word is acceptance, O-P. Your franchise is meaningless and efforts to effect the impermeable corruption through polite letters and courteous telephone calls are neigh-on imbecilic. The day will come when the people will send these scum an unmistakeable message.

  14. Lavrenti Beria

    “Our best hope is that the people in the regulatory agencies really do want to do the right thing, which is quite possible for people like Gary Gensler and Shiela Bair …”

    And that, sir, is no hope at all.

  15. Lavrenti Beria

    Sure, Rick. And you just keep on believing that.

  16. @Ohio-Papa “What can we as private citizens do to keep the spotlight on the selection of regulators who would battle for the public good?”

    My first answer would be to always remember that the selection of regulators who would battle for the public good does not mean for one second that you really get regulators capable to battle for the public good.

  17. Live simply.

    Create communities founded on service, creativity and sustainability.

    Pay as little tax as possible.

  18. Reliance on established coercive kleptocratic governments is a misstep, and only serves to reinforce their power. It is time to step away…

  19. Lavrenti Beria wrote:

    “Our best hope is …agencies … do … the right thing….”

    Our best hope is to be prepared for a financial hurt locker.

    Hurt Locker

    “noun. a period of immense, inescapable physical or emotional pain”

    ” Old military saying for someone who really f**ked up real good.” = (PTSD)

    http://www.urbandictionary.com/define.php?

    “Even before Stalin had been laid to rest, (Lavrentiy) Beria launched a lengthy series of reforms which rivalled those of Khrushchev during his period of power and even those of Mikhail Gorbachev a third of a century later.[103](Lavrentiy) Beria’s proposals were designed to denigrate Stalin and pass the blame for Beria’s own crimes to the late leader.[103]

    One proposal, which was adopted, was an amnesty which eventually led to the freeing of over a million prisoners.[105]

    Another, which was not, was to release East Germany into a united, neutral Germany in exchange for compensation from the West [106]—a proposal considered by Khrushchev to be anti-communist.[107] Khrushchev allied with Malenkov to block many of Beria’s proposals, while the two slowly picked up support from other Presidium members. Their campaign against Beria was aided by fears that Beria was planning a military coup,[108] and, according to Khrushchev in his memoirs, by the conviction that “Beria is getting his knives ready for us.”[109]

    On June 26, 1953 Beria was arrested at a Presidium meeting, following extensive military preparations aimed at heading off a possible civil war. Beria was tried in secret, and executed in December 1953 with five of his close associates. The execution of Beria proved to be the last time the loser of a top-level power struggle in the USSR paid with his life.”

    http://en.wikipedia.org/wiki/Nikita_Khrushchev

  20. I guess with the Patriot Act provisions, Homeland Security “cooperates” with them.

  21. jake chase wrote:

    “Wish I could believe Elizabeth Warren isn’t just another careerist in granny glasses. I can’t.”

    “Careerist people are ambitious and think that their career is more important than anything else.”

    http://dictionary.reverso.net/english-cobuild/careerist

    “Elizabeth Warren (born 1949) is an American attorney and law professor. …at Harvard Law School — where she teaches contract law, bankruptcy, and commercial law — and has devoted much of the past three decades to studying the economics of middle class families.”

    http://en.wikipedia.org/wiki/Elizabeth_Warren

  22. Mr. Kwak wrote:

    “Tilted Playing Field”

    Foreclosure Auction Investing Gone Wrong

    8/02/2010 02:54:00 PM – by CalculatedRisk

    “Usually when auction buyers lose money it is because they either overvalue the home, or the home was seriously damaged. However this is an unusual story from Carolyn Said at the San Francisco Chronicle: Winning bid on mortgage buys family heartache (ht Jesse)

    Roberta and Randall Strand took $97,606 out of their paid-off house to buy a foreclosed home at a courthouse auction. Five months later, they found out they actually bought the second mortgage, and that the bank planned to foreclose on the first mortgage, leaving them out in the cold.

    This is pretty easy to check. In this case the lender (Wachovia, now Wells Fargo) held both the 1st and 2nd and foreclosed on both. Because of timing issues, the 2nd went to the court house steps first – and the buyers are now out around $100,000. Well, probably less …

    Wells and the family negotiated a confidential settlement and were finalizing details late last week.”

    http://www.calculatedriskblog.com/

  23. Volatility

    The Truth About the Bailout

    There’s so much information (not to mention “information”) about the big banks, the Bailout regime, and the financialized economy the banks and government constructed and now use as the vehicle of tyranny.

    How to process it all? How to separate the good information from the bad, the useful from the pointless, the truth from the lies? How to weaponize each idea, anecdote, and piece of data?

    Here’s a list of criteria which are true and, I think, useful.

    1. The big banks caused the crash. They hold the overwhelming responsibility for a Tower of Babel which was bound to come down and is bound to come down again. Any other responsibilities are trivial. The proximate causes are irrelevant.

    2. The Bailout artificially props up insolvent banks. But in spite of their phony profits, the banks remain collectively insolvent, and most if not all of them individually so. Every cent they gamble and loot comes directly or indirectly from the Bailouts, from free QE money, from the TBTF premium. It’s ALL taxpayer money. The big banks are now permanent wards of the state. We the people OWN them once and for all, and are free to do anything we want with them, the moment we are inclined to do so.

    3. The Bailout accomplishes no socially valid end, but only enables the banks to reopen the casino.

    4. The Bailout only intensifies monopoly concentration, which lay at the core of the Too Big To Fail extortion dilemma. (The policy of TBTF only helps confirm the structure in a positive feedback loop.)

    4A. (Wealth and power concentration in themselves are anti-democratic, socially and economically destabilizing, and morally perverted.)

    5. The finance sector is a purely rent-seeking monopoly. We can place pretty much anything it does on the list of feudal tactics. Every cent they extract is a TAX upon us. All their “innovations” are con jobs, and all their lobbying is bribery and extortion. Rentier Wall Street is the driver of all federal government policy, with the corporatist government serving as a functionary, a conduit, and as a goon.

    6. No true reform will be legislated thanks to corruption. We can extend this: The system is so corrupt beyond redemption that there will never be constructive major legislation again. All major bills will be Potemkin at best (like the finance “reform” bill is looking to be), or a further assault (like the health racket bill). In either case they will only seek to further entrench the rackets oppressing us.

    7. Anything which is legislated will not be enforced thanks to corruption and capture. We can extend the principle: The law itself is a battleground, and the rule of law in great jeopardy.

    8. We don’t need the big banks for recovery, for lending, for international competition, for anything else. All the evidence is that smaller banks provide the real value here, while big banks are not only unable and unwilling to engage in constructive action themselves, but their monopoly power actively hinders the smaller banks.

    9. The size of the banks runs counter to our need for a decentralized economy with greater resiliency and robustness. The stimulus has been remarkable for how little money has headed in a constructive direction. This is because of the banks.

    10. Only the rich have benefited from the Bailout. Only they will continue to benefit. Everyone else is prey.

    11. The banks (and therefore the Bailout) fund the permanent war, which in turn militarizes the country for the benefit of the banks.

    12. The stock market is the terrorist wing of finance monopoly. Its purpose is to punish all public interest government action (for example letting the market work in Lehman’s case, or the Congressional rejection in the first Bailout vote). Such punishment is a tool of disaster capitalism, generating the sense of immediate crisis, the Shock Treatment, to terrorize and stampede policy-makers, the media, and the public into allowing or enabling the power and loot grabs.

    (On the other hand, it rewards official crime. Thus health insurance stocks have been a barometer of the policy debate on health reform, for example going up after every racket-friendly action on Obama’s part.)

    Appendix: The mainstream media’s coverage is systematically biased in favor of corporatism, often atrociously so. The infrequent good articles are accidents, incidental to the media project.

    The Bailout is a war upon America. This is Bailout Nation, Bailout America. (We should settle on a name for this debased regime, this perversion of America.)

    The basic principles of freedom and humanity tell us that the only measures of an economy’s health, practically and morally, is how well it empowers the people of a society to produce real goods and services for themselves, and how many good jobs it empowers them to create and preserve for themselves.

    No other metric has any inherent validity, and nothing else as far as money flow has any value. The rest is just a shell game.

    These truths dictate the right positive principle, relocalization, and the necessary negative principle, anti-corporatism. the need to smash the banks. For we are at war.

    The call – Smash the banks! Break up Too Big to Fail! Too Big to Fail is Too Big to Exist.

    Of any policy we must ask first, What will it do to help Smash the Banks? Of any alleged leader or would-be leader: Where is their call to relocalize? And what have they done to help Smash the Banks?

    http://attempter.wordpress.com/the-truth-about-the-bailout/

  24. rene wrote:

    “There’s so much information (not to mention “information”) about the big banks, the Bailout regime, and the financialized economy the banks and government constructed and now use as the vehicle of tyranny.

    How to process it all? How to separate the good information from the bad, the useful from the pointless, the truth from the lies? ”

    The the answer is different for each person.

    “So it is said that if you know your enemies and know yourself, you can win a hundred battles without a single loss.

    If you only know yourself, but not your opponent, you may win or may lose.

    If you know neither yourself nor your enemy, you will always endanger yourself.”

    Sun Tzu – The Art of War – 600 B.C.

  25. Stephen Colbert Compares Bush Tax Cuts To Digesting Bud Light Lime (VIDEO)

    08- 2-10 05:42 PM – Huff Post – excerpt

    “The bigger my tax cut is, the more money I can pour into the system,” Colbert said, taking a swig of the Bud Light. “Then very soon the benefits will work the way through the system and trickle down — I mean like a racehorse. Then the other 97 percent of poorer Americas are welcome to have as much of that as they can collect.”

    http://tinyurl.com/tax-cutss

  26. Aug. 02, 2010 2:59PM – Globe & Mail – excerpt

    “A recent slide in the price of gold is temporary and the precious metal will continue to rise for years, the founder of the world’s largest gold miner Barrick Gold Corp. said on Monday.

    Peter Munk, 82, Barrick’s chairman, said in an interview that economic uncertainty and investor wariness about other asset classes – particularly currencies – would continue to support gold, which hit record highs in June.

    “I expect the trend to continue because I think once people have lost confidence in their currency, once people have lost big money in equities and in bonds and traditional vehicles, their confidence in gold, especially having seen gold rise year in and year out for a decade, is reinforced,” he told Reuters.

    Despite U.S. government assessments that there is vast gold and other mineral potential in Afghanistan, Mr. Munk said that was not a region Barrick was interested in exploring.”

    http://tinyurl.com/2fcto9f

  27. Mr. Kwak wrote:

    “Titled Playing Field”

    “Our best hope is that the people in the regulatory agencies really do want to do the right thing…”

    August 2, 2010 06:00 PM – Huff Post – excerpts

    by Nassim Nicholas Taleb

    “Last year, in Davos, during a private coffee conversation that I thought aimed at saving the world from, among other things, moral hazard, I was interrupted by Alan Blinder, a former Vice Chairman of the Federal Reserve Bank of the United States, who tried to sell me a peculiar investment product.

    It allowed the high net-worth investor to go around the regulations limiting deposit insurance (at the time, $100,000) and benefit from coverage for near unlimited amounts. The investor would deposit funds in any amount and Prof. Blinder’s company would break it up in smaller accounts and invest in banks, thus escaping the limit; it would look like a single account but would be insured in full. In other words, it would allow the super-rich to scam taxpayers by getting free government sponsored insurance.

    Yes, scam taxpayers. Legally. With the help of former civil servants who have an insider edge.

    I blurted out: “isn’t this unethical?” I was told in response, “We have plenty of former regulators on the staff,” implying that what was legal was ethical.

    It has taken me so long (18 months) to react to the event partly because Prof. Blinder is scholarly, gentle in manners, the kind of likable person with whom I would have an intellectual conversation on occasion. In addition, having spent the last few years immersed in the classics, a certain sense of grandeur (from which I am looking for a cure) inhibited me from the reporting of journalistic anecdotes — Alan Blinder is certainly not the worst violation of my sense of ethics; he probably irritated me because of the prominence of his previous public position and due to the context of the Davos conversation, which was meant to save the world. But I have to transcend my human proclivities and swallow my sense of grandeur: someone used public office to, at some point, legally profit from the public.

    Tell me if you understand the problem in its full simplicity: former regulators and public officials who were employed by the citizens to represent their best interests can use the expertise and contacts acquired on the job to benefit from glitches in the system upon joining private employment — law firms, etc.

    http://tinyurl.com/a-scamm

  28. N.B. @ Anonymous

    I am not the writer of the Volatility blog !!!

    Volatility is written by Russ. A very accomplished writer. I have a big enough ego and ambition to get were his at. But for me reaching that point at his current age, we would have to fastforward to the year 2044, granting the fact I ever reach his level of accomplishment.

    The good thing is that my Russ’ point is proven. We are to scattered and trapped in pockets on the world wide web. Information overload.

    ‘How to process it all? How to separate the good information from the bad, the useful from the pointless, the truth from the lies? How to weaponize each idea, anecdote, and piece of data?’

  29. I forgot the quotation marks! That’s why, silly me.

  30. Lavrenti Beria

    “Beria was tried in secret, and executed in December 1953 with five of his close associates.”

    These are scurilous lies hatched by the Kruschevite-Malenkovite parallel center when its infamous anti-Soviet plot, hatched in June of 1953, failed. Let it be know that loyal elements in the security apparatus spirited me away to Stockholm as I was being taken by Red Army personel to a cell in the Lubianka. I’ve lived in undisclosed locations in Sweden ever since with my roommate Elvis Presley.

  31. Stephen A. boyko

    The power of accurate observation is commonly called cynicism by those who have not got it.

    – George Bernard Shaw

  32. Lavrenti Beria

    “Wish I could believe Elizabeth Warren isn’t just another careerist in granny glasses. I can’t.”

    Either can I. The famously “principled” Warren caved infamously when it appeared that a compromise would be necessary to launch the agency whose leadership she so obviously covets. No compromise, no agency. I sure you’ll be able to add it up from there.

  33. Stephen A. boyko

    Government agencies are structured to conform to external and internal paper flow. This has little to do with how the industry actually works and poses a real conflict.

    Successful bureaucrats eitherl are Cromwellian, Radar O’Reilly paper pushers or industry Machiavellians like Joe Kennedy.

    Academics are not usually known for their administrative ability and given the lack of structure and procedures this puppy has a lot of 11-foot pole marks on it.

    Pathfinders are easily recognizable by the arrows.

  34. Stephen A. boyko

    One more thought that is diabolical enough to be worth a shot__ Bernie Madoff.

    Put him under “office arrest” and let him work on commission to be paid into an investor trust fund. If the incentives are structured properly Bernie could be out in 5-10 years. He has no love for the oligarch banksters and you don’t have to worry about regulatory capture.

  35. I’ll say this again. There are a few good Senators out there. Jeff Merkley, not even halfway through his first term, has been exceptional. Our other Senator Ron Wyden has made it his mission to get secret holds thrown out. He’s a classic grinder – likes to play basketball to keep loose and sharpen his elbows. I’ll bet he’ll get it done.

    All depends on who’s in the “most exclusive club in the world”. Now I’m not naive. We’ve built a multi-billion dollar industry on getting lazy, blown-dry, airbags elected, people who specialize in what carney-barkers used to call double-talk. We’ve voted for them in the past and we’ll vote for them in the future.

    But nothing is cut and dried, nothing.

  36. Bruce E. Woych

    Mr. Kwak:
    “Unfortunately, however, the pressure of the public spotlight is largely off, tilting the battlefield in favor of industry.”

    Our best hope is that the people in the regulatory agencies really do want to do the right thing,….
    …This is a big reason why we don’t need neutral arbiters as the heads of these regulatory agencies–we need real advocates who will take the side of ordinary people and the real economy against a financial sector that is still too big and too predatory.”

    There is a great deal of skirting around the issues and “code” language in the general arena of the tilted playing field, partly because no one wants to completely “tip” their hand. As long as the “pressure of the public spotlight” is lit, we will have a process in which experienced no-names can truly become bigger than life public figures. This has always been a motivation and incentives truly derive from the legitimate prestige and recognition of having accomplished qualitative standards that are of true public service.

    Perhaps the propagander of elitism is part of the problem. Believing that there is some Darwinian or Spencerian hierarchy that needs to police itself by peer review is a false premise. Believing that the pressure from the professional “public spotlight” is the top / down dissent directives is another class specific lock down on the truth. Thinking that this economy is going to wait 2 years while financials do whatever they want to do because lobbyists are stalling the system…may be a sad miscalculation on the desparation and disconnect of the working class frustration and pain threshhold. The truth may lie not in “reforming” the banking or private equity supply chain, but in “transforming” the way we think about the stratified systems we have created.

    We need to enlist the commercial bankers and the credit unions into the process of defining such a transformation. Let the reformers and regulators write some books and tell all. LEt’s get some new reputations based upon credibility instead of Ivory Tower credentials and the falicies of theory derivitives sold to the public in all such similar tranches of ideological contention.

    Let’s get aggressive and create a public backlash with some authority that doesn’t fold to the financial sector denials. The truth is that the media doesn’t effectively put pressure on the “industry” but the other way around. The industry is all too effective in political and economic domination and the compulsive demand that we accept them for what they say. The fact is clear that investment banking needs to be cut away from the basic commercial banks that serve the production of social economy. Banking is not “the” economy, and as long as we treat the finacial sector as the aristocracy of greed, we will continue to excel in only excess and competitive delusions.

  37. Bruce E. Woych

    The elite financial system inevitably ends up “churning” the system and selling the infrastructure short. Period! Fix THAT!

  38. True that Bruce E. Woych! “Fix THAT!” There seems to be this unsettling proclivity within the socalled leadership to tolerate crimes, criminals, and criminal enterprises, because of some supposed horrorshow if the socalled TBTF oligarchs, and their predatorclass management are replaced with more sensible, more transparent, and more law abiding alternatives.

    The government is already the defacto backstop for the oligarchs. Why not get rid of them, by any and every means possible, have the government erect a resolutiontrustlikeenetity, rip this monstrous criminal syndicate apart and begin anew, with something more legal, fair, equitable, honest, and focused on the nations, and the peoples best interests, – and NOT the obscene enrichment of the predatorclass alone, singularly, and exclusively.

    I’m obviously NOT predatorclass. I am one of the many hundreds of millions impacted by the predatorclass crimes, abuses, PONZI scheme’s, and wanton profiteering, – and from my pedestrian perspective, – – I don’t see how things economically – not to mention morally – could possibly be worse.

    Can any of you erudite economists and financiers explain to me what exactly would be different or so terrible if we, or the the government somehow managed dismantle the socalled TBTF oligarchs, and forbid their evil managements forever from any government, or finance sector post. Have these fiends not made enough money and done enough damage to deserve exile or worse?

  39. re: #6- Would campaign finance reform get us anywhere? It seems a necessary first step, to me.

    One of the main frustrations is the uninterested voting public, soporized by TV.

  40. And we can’t forget how motherly she was towards financial innovation.

  41. This is OCC’s going away party for John Dugan. When I saw this sentimental footage of Mr. Dugan I got so verklempt I had to run to the store for extra tissue. Mr. Dugan inspired us all. Especially the American Bankers Association http://www.youtube.com/watch?v=KnMa652dZ5E&feature=related

  42. Bayard Waterbury

    This financial regulation, because of its vastness and complexity, was a steaming pile of legislative manure when it was signed, and is destined to become a larger steaming pile of regulatory dung over the next several months and years. Talk about creating essential uncertainty in markets!! Look, I am a died in the wool progressive. This single piece of legislation may do more to wreck the economy of this country and the world as much as anything that will likely come out of Basel III, and all that will do is add more to the global financial uncertainty. This is what happens when logic looses to politics. Of course none of us can pretend that things were far better anytime in the last three quarters of a century, but recent happenings seem at least an order of magnitude (as in Richter Scale) worse than ever. Count me as completely flabbergasted if anyone seriously benefits from this more than the average plutocrat. Great job, James, but really unnecessary. Almost everyone in your blogosphere was already onto this bigtime.

  43. Brad Thrasher

    In 1776 we killed the King and set ourselves free. In 1913 we hired the King’s banker and enslaved ourselves again ((((sigh))))

  44. Al Mostonest

    This is why the failure of the Brown-Kaufmann Amendment (breaking up the banks) was a good indication that the fix was in and the game was up. Now we are placing our hopes in the personalities and vagaries of regulators. Aren’t we supposed to be a nation of laws and not of men?

  45. Stephen A. Boyko

    Talk about creating essential uncertainty in markets!!

    How can you govern “risk” and “uncertainty” with one-size-fits-all, deterministic regulatory metrics?

  46. And as long as you bring up idiotvision, the mainstream media wants to put an APB for the Gulf oil spill, sponsored by BP:

    If anyone has any information confirming any negative effects relating to the oil spill rumor, please call them when you get a chance.

    http://motherjones.com/rights-stuff/2010/07/mainstream-media-helps-bp-pretend-theres-no-oil

  47. Russ wrote:

    “That’s the way it is today. We have reached such a critical time. Madison’s warning here is reminiscent of that in Hamilton’s #1. He acknowledges the potential moral and spiritual pitfalls besetting the intrepid path. It’s an admonition for the ages. But even more clear is the malevolence of those who oppose what history and the spirit decree as necessary. Out of greed, out of sadism, out of cowardice, from wherever their will to crush the human soul springs, they “cannot be upright, and must be culpable”, as Madison says.

    Who is the fated audience?”

    We Need A New American Energy (Madison’s Federalist #37)
    http://attempter.wordpress.com/

  48. Zeitgeist: Addendum by Peter Joseph. Full movie.

    Sharing this movie is encouraged.

  49. History! We did not kill the king, who lived on into the 19th century, lost his mind, and eventually died in 1820.

  50. Bruce E. Woych

    http://www.alternet.org/story/147699/elizabeth_warren%3A_my_mission_is_to_restore_america%27s_great_middle_class?page=entire
    Elizabeth Warren: My Mission Is to Restore America’s Great Middle Class

    At Netroots Nation, Elizabeth Warren spoke about how to make the new Consumer Financial Protection Bureau help protect the U.S. economy. READ MORE

    Elizabeth Warren / AlterNet

  51. Stephen A. Boyko

    @ Bruce E. Woych
    @ Per Kurowski

    Ms. Warren said “Glass-Steagal, tried to separate the risk-taking on Wall Street from your local community bank”

    But what separates “risk” from “uncerctainty”

    See:

    Dodd-Frank: A fine alphabet soup appetizer, but where’s the beef?

    http://readingthemarkets.blogspot.com/2010/07/dodd-frank-fine-alphabet-soup-appetizer.html

    ” … In a world of financial innovation, it is “uncertainty” — not “risk” — that should be the randomness component of focus. Uncertainty is different from, rather than a higher degree of, risk. This distinction was made famous by economist Frank H. Knight in his seminal book, “Risk, Uncertainty, and Profit” (1921). Risk refers to situations in which the outcome of an event is unknown, but the decision maker knows the range of possible outcomes and the probabilities of each. Uncertainty, by contrast, characterizes situations in which the range of possible outcomes, let alone the relevant probabilities, is unknown.

    If there is complexity, there is uncertainty. For example, software iteration 2.1 was written because of unforeseen circumstances experienced with version 2.0. As there are innate complexities in the capital markets, the element of uncertainty always will be a part of complex adaptive systems.

    Difficulties arise when risk is conflated with uncertainty under deterministic, one-size-fits-all governance metrics that frustrate the market’s price discovery function. We can insure (put options) and hedge (Ford and Exxon) risk. We can insure (natural disaster insurance) uncertainty, but we cannot hedge (Ford and pork bellies) uncertainty. If we cannot hedge, we cannot regulate risk and uncertainty in a one-size-fits-all regime due to non-correlative information. It is similar to having a single thermostat regulate temperature for H2O conditions of ice, water, and steam.

    Investments that lack cash flow and are valued on a mark-to-model basis are uncertain. Credit default swaps (CDSs) are uncertain derivatives that required constant hedging by dealers. This activity resulted in cost with very little benefit. Absent randomness segmentation, indeterminate information cannot be processed effectively and efficiently by determinate metrics.

    … The solution for Dodd-Frank-type legislation with one-size-fits-all deterministic regulatory metrics is to segment randomness into: predictable (money market investments), probable (positive cash low, earnings-driven, NYSE and NASDAQ issuers that are marked-to-the-market) and uncertain (negative cash low, event-driven issuers that are marked-to-the-model) regimes.

  52. Thanks for connecting the dots.

  53. I have done a lot of municipal consulting and have directly observed that otherwise ineffective people, who have been politically disempowered, will push back against the status quo provided that they have confidence that their leadership will support them. In organizations where this sort of leadership change has been politically achieved much has been accomplished. Hard to imagine that these “sleepers” will not wake up to the call of Ms. Warren!

  54. Stephen A. Boyko

    Ms. Warren could very well be Super Woman. From all indications she is a qualified individual.

    I argue that the solution’s independent variable is not the TBTF scale of the financial institutions but the randomness of the underlying investments.

    How can you have accurate capital standards (Basel or any other)that provide a one-size-fits-all cushion for both risk and uncertain holdings?

    So until that is recognized and disclosed, Ms. Warren or any other person chosen is in for a long “struckin fuggle.” If you like gorrilla war fare, Warren as director and Madoff as special assistant works.

    See my comment to Bruce Woych and Per Kurowski below

    or reference

    Dodd-Frank: A fine alphabet soup appetizer, but where’s the beef?
    http://readingthemarkets.blogspot.com/2010/07/dodd-frank-fine-alphabet-soup-appetizer.html

    or reference

    “We’re All Screwed: How Toxic Regulation Will Crush the Free Market System” and a series of articles on capital market governance.

    http://www.traderspress.com/detail.php?PKey=671

  55. Lavrenti Beria

    One now sees how absolutely ineffectual was the stink raised about White House antipathy to the Elizabeth Warren appointment. All the threats about the 2012 election from identifying academicians and the non-profit wine and camembert set have fallen flat. Big Sis just might not be appointed.

    From the wars in Iraq and Afghanistan to the bailouts of criminal bankers, the ruling class in this country has proven itself an indomitable antagonist of the peoples’ interests, not that the appointment of the ambitious Warren would indicate otherwise. So arbitrary has their rule become that even the caprices of a Josef Stalin are seen as modest in comparison. In 1940, Stalin tracked down Trotsky in Mexico and had him assassinated. Surreptiously today, our overseas assassination teams become a substitute for Congressional declarations of war and the operation of due process. And what uncorrupted vehicle of expression remains to the people? None, absolutely none. The only meaningful answer is to be found in the general strike and massive public demonstrations.

  56. I’m beginning to understand what the bloodletting around the world is all about; no political solution.

  57. @ Beria EW would had the nomination by now unless there were serious background machinations conspiring against her. The same ones that made sure that consumer protection would be in the Fed’s basement.

    http://www.nakedcapitalism.com/2010/08/knives-out-for-elizabeth-warren.html

  58. Re: @ Anonymous___Beatrice Webb (1858-1943) Quote: If I ever felt inclined to be timid as I was going into a room of people, I would say to myself, “You’re the cleverest member of one of the cleaverest families in the cleaverest class of the cleverest nation in the world, why should you be freightened?”___Quote: Lord Rosebery (1847-1929) #1/2…”And now we cannot but observe that it is beginning to be hinted that we are a nation of amateurs” #2/2…”I must plough my furrow alone. That is my fate, agreeable or the reverse; but before i get to the end of that furrow it is possible that I may find myself not alone.” PS. The vanity of intellectual hubris is shortlived by its overshadowing atrophy truncated by a vitiated self`-consciousness?

  59. Hello,

    I apologize about leaving this hear but I couldn’t find proper contact information elsewhere on the blog. My name is Jonathon Matthews and I work for InvestingChannel. I’ve been reading over your blog a am quite impressed with the quality of the content. You also seem to have quite a strong and loyal following which makes the fact that there is little monetization on the site shocking to me. I would love to speak with you more about monetizing your site. Please feel free to contact me if you are interested. My email is Jon [at] InvestingChannel.com.

  60. Here are a couple more worthy links, courtesy of a marketwatch pal:

    http://market-ti
    cker.org/archives/2545-BLATANT-Equity-Market-Manipulation.html

    http://jsmineset.com/2010/08/02/the-death-of-market-fundamentals/

  61. ” My name is Jonathon Matthews and I work for InvestingChannel.”

    http://www.investingchannel.com/about-us/

  62. Lavrenti Beria

    When I referred above to “identifying academicians and the non-profit wine and camembert set” I suppose I couldn’t have had anyone more specifically in mind, than the author of the piece you cite here. Sorry, but I confine my reading to people with some modicum of moral development. Smith utterly lacks any.

    Limosine liberals like Smith are precisely what’s wrong, sir. Their self-advertising notwithstanding, one struggles to conceive of them as having value any more profound than revenue generating book writing and speech giving. They’re great at conclaves of their peers at the Roosevelt Institute where their self-serving chit-chat is likely followed by a trip to the Metropolitan Opera. The people aren’t fooled by such pretentions, Clyde. They have more exacting standards than those met by trash like Smith.

  63. “What separates ‘risk’ from ‘uncertainty'”

    As a software engineer for many years, I understand that the conflation of risk and uncertainty which you expect will neutralize efforts to apply regulation is very real. I cannot provide a real estimation of the ‘risk’ of applying a software patch unless I have a good deal of understanding of the system being patched and the nature of the patch being applied. Seems that is why Ms. Warren wishes to follow a path of simplification. To “simplify” reduces the range of expected outcomes no matter how puerile the concept. For instance, if a program does not alter values in the primary table we can use this table to evaluate the results of our calculation and in doing so reduce the uncertainty of the outcome even if we do not control for the input values. I expect that is why Mr. Johnson and Mr. Kwak often mention that the complexity of these new financial “innovations” is a very real part of the problem and I guess I suspect that the originators have the only real “primary” table to allow them to make a better hedge on outcomes.
    So if one size cannot fit all for regulation then group (glass stegal) or provide/design a simplified avenue for the bulk of ordinary peoples money to earn interest, and benefit society without being subjected to the dangers of such uncertainty.

    Unless we find a way to provide markets not so convoluted that no one can regulate them then you are right, we are screwed!

  64. @ RickC “Unless we find a way to provide markets not so convoluted that no one can regulate them then you are right, we are screwed!”

    Not necessarily. Do never underestimate how totally unregulated markets could find a way that is good for the society.

    In this particular case it was the regulators who created the regulations that lead us right into the current crisis… had the capital requirements for the banks been the same no matter what the credit rating agencies said, then we would not have suffered this wild-goose chase after the triple-As

  65. Stephen A. Boyko

    @ RickC Great response!

    You said “Ms. Warren wishes to follow a path of simplification.”

    But do you simplify by limiting the number of investments choices (tough to sell limiting choices, just ask the Soviets) or by segmenting into predictable, probable, and uncertain regimes to limit category errors attendant randomness (my preference and what you call not so convoluted submarkets).

    What I believe you can’t do is what we are doing! What current regulators, Messrs Johnson and Kwak, and Ms. Warren have not addressed is whether you can govern randomness (predictability, probability, and uncertainty) with one-size-fits-all deterministic metrics—simplified or not. Pursuing this course has resulted in larger and more frequent economic dislocations.

  66. Stephen A. Boyko

    @RickC

    Oversight Mulligan

    You said “the originators have the only real “primary” table to allow them to make a better hedge on outcomes.”

    See: Dodd-Frank: A fine alphabet soup appetizer, but where’s the beef?

    http://readingthemarkets.blogspot.com/2010/07/dodd-frank-fine-alphabet-soup-appetizer.html

    Difficulties arise when risk is conflated with uncertainty under deterministic, one-size-fits-all governance metrics that frustrate the market’s price discovery function. We can insure (put options) and hedge (Ford and Exxon) risk. We can insure (natural disaster insurance) uncertainty, but we cannot hedge (Ford and pork bellies) uncertainty. If we cannot hedge, we cannot regulate risk and uncertainty in a one-size-fits-all regime due to non-correlative information. It is similar to having a single thermostat regulate temperature for H2O conditions of ice, water, and steam.

    I believe that this was a big problem with derivative viral hedging.

  67. Don’t Bogart that joint my friend, pass it over…

  68. 99 Weeks Later, Jobless Have Only Desperation

    August 2, 2010 – NT Times – excerpt

    BRATTLEBORO, Vt. — “Facing eviction from her Tennessee apartment after several months of unpaid rent, Alexandra Jarrin packed up whatever she could fit into her two-door coupe recently and drove out of town.

    Ms. Jarrin, 49, wound up at a motel here, putting down $260 she had managed to scrape together from friends and from selling her living room set, enough for a weeklong stay. It was essentially all the money she had left after her unemployment benefits expired in March.

    Now she is facing a previously unimaginable situation for a woman who, not that long ago, had a corporate job near New York City and was enrolled in a graduate business school, whose sticker is still emblazoned on her back windshield.

    “Barring a miracle, I’m going to be in my car,” she said.

    Ms. Jarrin is part of a hard-luck group of jobless Americans whose members have taken to calling themselves “99ers,” because they have exhausted the maximum 99 weeks of unemployment insurance benefits that they can claim.

    For them, the resolution recently of the lengthy Senate impasse over extending jobless benefits was no balm. The measure renewed two federal programs that extended jobless benefits in this recession beyond the traditional 26 weeks to anywhere from 60 to 99 weeks, depending on the state’s unemployment rate. But many jobless have now exceeded those limits.

    They are adjusting to a new, harsh reality with no income.”

    http://www.nytimes.com/2010/08/03/us/03unemployed.html?_r=1

  69. Brad Thrasher

    It was allegorical Katherine. But hey technically speaking you’re absolutely right Katherine. There feel better now, technically speaking?

  70. Brad Thrasher

    Pass. I gave it exactly 4:31. When it started on it’s 3rd introduction I assumed it’s intended for slow learners.

    I’m not so enamored by art as to accept being insulted by it. No doubt it will find an audience, lol.

  71. “…battlefield…”?

    The battle is over. We lost.

  72. Brad,

    You left 30-seconds too soon. Panning for gold requires a little effort. Food for thought.

  73. Denninger is a real hero in getting to the bottom of some of this stuff.

    The recent GDP revisions are well covered here:
    http://market-ticker.org/archives/2551-How-To-Read-The-REAL-GDP-Chart.html

  74. Frank Galvin (Paul Newman), The film The Verdict (1982!) starts his summation with this:
    “And after a time, we become dead… a little dead. We think of ourselves as victims… and we become victims. We become… we become weak. We doubt ourselves, we doubt our beliefs. We doubt our institutions. And we doubt the law.”

    As I surmised in my Blog article, “I firmly believe that this is where millions of ordinary, hard-working, caring citizens of many countries have arrived today because of the lack of integrity, the lack of honesty and the lack of grace shown by so many in positions of power and privilege.”

    In the end the good people will rise up!

  75. Cool Hand Luke – Paul Newman & Strother Martin – 1967

    “Failure to communicate”

  76. @ Beria : The direct link to the cited article written for the LA Times by Jim Puzzanghera follows:

    http://www.latimes.com/business/la-fi-elizabeth-warren-20100801,0,953346,full.story

  77. Fed Mulls Measures To Prevent Double-Dip

    Tuesday, Aug. 03, 2010 7:27PM – Globe & Mail – excerpt

    “The U.S. Federal Reserve meets next week amid mounting evidence that the world’s biggest economy is slowing and increasing questions about whether new measures are needed to ward off deflation and prevent a double-dip recession.

    After expanding at a slower-than-estimated pace between April and June, the U.S. economy carried precious little momentum into the second half of the year, three reports released Tuesday showed.

    Taken together, the data paint a worrisome picture of indefinitely tepid growth that in a worst-case scenario could spur a widespread drop in prices and another slump.

    As Fed chairman Ben Bernanke and his officials prepare to meet on Aug. 10 in Washington, weighing heavily on their minds will also be this Friday’s employment report from the Labour Department. Economists predict the private sector added a paltry 90,000 jobs in July, not enough to keep the 9.5-per-cent unemployment rate from rising as the U.S. Census Bureau cuts thousands of temporary workers.

    “There’s a lot going on behind closed doors right now,” Eric Green, chief U.S. rates strategist for TD Securities in New York, said in an interview. “In terms of what happens next week, I just don’t think that the Fed has come full circle on this yet.

    But the risks are mounting that they’ll have to do something.”

    http://tinyurl.com/237ajyw

  78. Bruce E. Woych

    The segmentation you seek is actually specializations and in our context we require a differentiation of levels of risk in that question of uncertainty. The fact that “indeterminate information” exists to be manipulated as asymmetrical information is different from measures of methodology to create a decision process that minimizes or at least reduces the potentials of unnecessary risk. To break things down to size is analysis and we depend on the best practice standards for helpful support in risk taking ventures that have merit. The truth is that we do require expert regulators to oversee the real time actions of these “best practice” regulations and see that they are not intentionally abused. I would agree that no “universal” metric measure is the answer here and that it requires interpretive agency withing guidelines. But we should not be so quick to throw out the baby with the bath water in this dismissal of general rules of order.

    Overall I would think that your evaluations derive from a lot of paperwork and experience attempting to decipher financial transactions that are deliberately (they love to call it elegant) and intentionally impossible to understand. the use of small print and obscure (even inverted) language and outright misnomers are a patent medicine of financial legal meticulations. Corruption is highly adaptive and adjustable. To say that one size regulation won’t work is not a game stopper, it is a starting line.

    It would be nice if the investment banks were placed back in perspective and kept away from the commercial lenders who actually work with blue collar integrity. It would be nice if investment banks were distinguished by their domestic or international scope. And it would be good old fashion “comparative advantage” if we could integrate the workings of these three distinct specializations to serve each other and to integrate access to their resources with more regional and localized community level banks. But this is a reconstruction job for a fiction not a realistic history.

    Overall if you don’t like the legislation you have to start with the politics not the financiers. They DO! In that regard the old adage is to follow the money. With that in mind it is only one cobble stone step over to corporate sponsored political positions and the entire issue of what money can and does buy in politics.

    RE: Citizens United decision / August 3, 2010 follow-up on news: from Alan Grayson in Florida

    “Last week, the Shareholder Protection Act passed the House Financial Services Committee. This bill requires shareholders to approve political spending by corporations. It’s one of our key priorities in stopping the buy-out of democracy by corporations.

    Overall, three of our six proposals in the Save Democracy platform have moved through the House. In the DISCLOSE Act, there’s a ban on Federal contractors spending money on elections, and on foreign companies intervening in American elections. And now shareholders will get a say in corporate spending.

    This is not enough, but it’s a start. If you’d like to know more about the Shareholder Protection Act, you can read a summary of the debate at OMB Watch:

    http://www.ombwatch.org/node/11180

    http://www.ombwatch.org/node/11180

  79. Stephen A. Boyko

    @ Bruce E. Woych

    Interesting response. Will read OMB links later and respond.

    Four questions to ensure that I understand your comments and prevent misunderstanding on my part.

    You said: “The segmentation you seek is actually specializations and in our context we require a differentiation of levels of risk in that question of uncertainty.”
    Question: Do you believe that the market is efficient (EMH)?
    Question: Is uncertainty is a higher form of risk expressed as a continuous function?

    You said: “To say that one size regulation won’t work is not a game stopper, it is a starting line.”
    Question: Is there a sense of urgency given that one-size regulation has produced larger and more frequent economic dislocations?

    You said: “if we could integrate the workings of these three distinct specializations to serve each other”
    Question: By three distinct specializations do you mean the underlying economic conditions attributable to randomness of predictability, probability, and uncertainty?

  80. Lavrenti Beria

    Thanks for the revised link, Clyde. For a moment there I thought I was going to have to wade though a moral swamp to read it.

    So many focus on Warren’s allegedly “tough” questioning of witnesses at the hearings that they fail to detect just how badly she was rolled at the time. Warren’s picture perfect on PBS when the purpose is to create a public impression of herself but when the chips are down she’s a disaster. Her acceptance of the compromise placing the cpfb under the auspices of the Fed is a case in point. A more principled person would have gone down with their ship on that one but not Warren. Warren realized that if there were no compromise there would be no agency. That, in turn, would have meant no appointment, eh? Trust me, we can do without a consumer protection bureau that has all of the basso profundo of a castrati.

  81. An update on the very welcome sweeping out of the trash of John Dugan from OCC (Office of Comptroller of the Currency). Once the horridly pungent odor of the ABA rear-kissing Dugan is cleared from the OCC (may take some extra heaps of Glade air freshener and a super industrial powered fan), it’s very important that they choose solid replacements to improve the OCC.

    Over at theParetoCommons blog two names they suggest are North Carolina Banking Commissioner Joseph A Smith Jr., and New York Banking Superintendent Richard H. Neiman. The appointment of one of these 2 gentleman would be a sign that President Obama is finally taking his leadership role in this seriously, instead of handing these crucially important decisions over to Goldman Sachs’ Lackeys Summers and Geithner. If names like these are not chosen, the new Financial Reform laws will quickly become a joke, which it seems is how Dick Shelby wants it.

    By the way it also appears (according to Pareto commons blog and Bloomberg) that there was an attempt to bypass Elizabeth Warren for CFPB with Sheila Bair of FDIC, which has failed due to Bair’s lack of desire to take the offer.

    One of the main obstacles to Elizabeth Warren getting the CFPB job (other than little Timmy Geithner crying to Mommy he was emasculated by her in testimony) is Republican Dick Shelby. Republican Dick Shelby disagrees with her appointment for “philosophical grounds”. I assume the “philosophical grounds” would be Miss Warren doesn’t share Shelby’s philosophy to lick the ABA’s (American Banking Association) balls.

    You can read details at these 2 links:
    http://www.theparetocommons.com/2010/08/the-new-financial-regulators/

    http://www.bloomberg.com/news/2010-08-03/fdic-s-bair-said-to-rule-out-leading-consumer-bureau-after-push-from-dodd.html

  82. All too predictable. They will merely hasten the coming collapse of the dollar. One way to save the dollar would be to attack Iran. Desperate times call for desperate measures and if I’m not mistaken, the U.S. once warned Saudi Arabia that the U.S.would never allow itself to be economically strangulated by an oil embargo. All options are on the table as they say. Appreciate all your posts, btw, Rickk.

  83. One more thing I would like to add on this issue. Senator Chris Dodd has verbalized his supposed wish to carry on the legacy of Ted Kennedy. Ted Kennedy was a man who was, occasionally, more than happy to take on a challenge. Ted Kennedy would have supported and run with the nomination of Elizabeth Warren for head of CFPB, and DARED Dick Shelby and the Republicans to block her appointment. Ted Kennedy would have gotten right into Shelby’s face and asked him “Why, Republican Senator Shelby?!?!?!?!? Why do you not care for the depositors, savers, and taxpayers of Alabama?!?!?!?!” Kennedy would have fought the fight in the public arena, on the Senate floor in courageous speeches. Unfortunately for hard-working Americans Chris Dodd is looking for the cowardly alternative to doing the right thing. And Dodd will be remembered as a coward after the next economic crisis for not supporting Elizabeth Warren. This will be the Dodd legacy.

  84. P.S. I am certainly not in favor of attacking Iran, anymore than I support the nation’s other military adventures in Iraq and Afghanistan. But a bid to prop up the dollar would be a covert reason to attack an oil rich country, obviously.

  85. “Are the American People Obsolete?” by
    Michael Lind:

    http://www.salon.com/news/feature/2010/07/27/american_people_obsolete

    Excerpt:
    “Have the American people outlived their usefulness to the rich minority in the United States? A number of trends suggest that the answer may be yes.”

  86. Bruce E. Woych wrote “I would agree that no “universal” metric measure is the answer here and that it requires interpretive agency withing guidelines. But we should not be so quick to throw out the baby with the bath water in this dismissal of general rules of order.”

    There is not a baby in the bathwater but a monster and it should be thrown out as fast as possible. That monster is the belief that a default is something intrinsically bad and that therefore we should have regulatory discrimination based on the perceived risk of default.

    Since the regulators should have know that nothing perceived as risky has ever created a financial or a bank crisis, and that these always originated from excessive investments or lending to what was perceived as not being risky, those dumb regulators who came up with the nonsense of reducing capital requirements based on lesser perceived risks, need also to be thrown out urgently with the bathwater.

  87. Lavrenti Beria

    Hello Jon,

    And I’d like to talk to you about some distressed real estate I’m sure you’d be interested in considering. That’s all we do here on this site, network about our careers and our personal business interests with a view to self enrichment. I’m sure you’ll fit right in.

  88. Martin Watzinger

    In this blog it is often alluded that we do not know how to measure market power in investment banking. On this issue, John Asker wrote a phantastic article in the new issue of the Journal of Political Economy
    http://pages.stern.nyu.edu/~jasker/Competition080826.pdf
    about the impossibility of firms to switch to investment bank which also serve a competitor firm. Taking his work at face value implies that market power is grossly underestimated by market share data.
    You all certainly know this paper but just to make sure.

    Best Martin

  89. Brad Thrasher

    Okay Rickk, I’m lazy and you indulge redundancy. Guess that makes us both human ;) I did give that 30 seconds and watched.

    The idea of a resourced based economy based upon abundance was first introduced to me through an organization known as Technocracy, Inc. more than forty years ago.

    I see, from the video that these current idealists fail to outline how their society will be organized.

    Nothing has changed in over 40 years. I will visit the zeitgeist and Venus Project sites and see if there’s anything new.

    I hung in for the entire 2 hours as I enjoyed the visit to the idealism of my youth, however impractical and incomplete such notions were then and are today.

    BTW, they could edit that down to about 50 minutes and it would be more effective.

  90. Brad Thrasher

    P.S.

    I will also study and shepardize Daly v. First National Bank. I just might use it, if I can.

  91. COIN tactics – psycho ops in full operation by Homeland Security against “people” in USA.

  92. Brad Thrasher

    P.P.S.

    Well that didn’t take long. First National won on appeal, Daly was later disbarred and convicted of willfully failing to file income tax returns.

    Nothing like telling the rest of the story. I wonder what other facts they omitted.

  93. Thanks Lawrence.

  94. Annie,
    Who will Homeland Security “determine” is a larger threat, the financial’s current 40% middle fee, as oppossed to the traditional 3%, or those that protest?

  95. Those that “protest”.

    Any “citizen” that is capable of STILL mounting a “protest”

    (after every act of “conditioning” and “medicine” and “religion” failed to knock the person down and keep them down while they are being robbed)

    against a predator is a security threat.

    Mano et mano against a predator may start out “peaceful”, but there is no way it can end “peacefully”.

    Just giving you their endless capacity for self-serving “logic”.

    But what am I saying – of course you know all this!

    You already used it to avoid explaining how so much THEFT happened right after the “Patriot Act” became “law”.

  96. @Wright, that’s rough but rings the bell.

  97. Annie , So how do you get this in the public dialogue instead of the trash discourse?

  98. Thanks for watching the video Brad.

    I do not hold Zeitgeist: Addendum as the absolute TRUTH. I do think that the main thread of the movie is TRUE. And that is TRULY shocking!

    In regards to Daly v. First National Bank, have you read through the affidavit of Jerome Daly?

    Quote; “Mahoney should be cited for bravery and not for contempt.”

    http://www.lawlibrary.state.mn.us/CreditRiver/1969-06-26affidavitofJeromeDaly.pdf

    Furthermore,

    “It is well enough that the people of the nation do not understand our banking and monetary system for, if they did, I believe there would be a revolution before tomorrow morning.”

    Attributed to Henry Ford. The earliest citation found is the article “In the Mercury’s Opinion: How Internationalists Gain Power”, Russel Maguire, American Mercury, October 1957, p. 79

  99. And if Italian Prime Minister Silvio Berlusconi gets hung ala Mussolini will that effect the business community?

  100. NotBuffaloed

    I would give Ms. Warren a chance. She has clearly and bluntly articulated her questions targeting specific issues regarding the failure of our regulatory system. This leads me to believe that she could be a good regulatory agency appointment that would be on the side of “the people.” There’s no guarantee, of course, but I’d rather give Elizabeth Warren a try than someone appointed by Timothy Geithner.

  101. EXTEND AND PRETEND: The Obama Administration’s Failed Foreclosure Program

    08- 4-10 01:21 PM – Huffington Post – excerpts

    “President Barack Obama’s signature plan to combat the housing crisis has fallen short of its goals — rather than significantly and permanently reducing home foreclosures, it is only delaying them.

    In its first year, 1.5 million people were invited to try HAMP. About 40 percent of those who tried it have been kicked out of the program; fewer than that have been given an actual shot at keeping their homes.

    When President Obama took office, it took an average of 319 days to complete a foreclosure, according to Jacksonville, Fla.-based data provider Lender Processing Services. Now it takes 461 days.

    Extending the process by which homes enter foreclosure allows banks to continue carrying the loans on their books at full value, delaying loss recognition. That allows unhealthy banks to appear healthy, staving off costly bank failures.

    “It pains me to say that, but that’s the situation they’ve got us into. Throwing these people out on the street and selling their homes would have depressed home prices.”

    The strategy has achieved stability for the housing market, but not for the people inside the houses. Families are merely given more time to wonder when sheriff’s deputies will finally pile their belongings on the curb.

    So with foreclosures slowing, fewer distressed homes have hit the market. The so-called “shadow inventory” of homes — those with severely delinquent mortgages, in foreclosure or already repossessed that have not yet been put on the market — has grown and is estimated to range from 5 to 7 million homes. Through June, borrowers in foreclosure have been delinquent for an average of 461 days before being evicted from their homes.

    In June, analysts at Fitch Ratings projected that as many as 75 percent of HAMP homeowners will ultimately re-default — despite the lower monthly payments. Last month, analysts at Barclays Capital said they project a 60 percent re-default rate.”

    http://tinyurl.com/extend-and-pretend

  102. Deak wrote “P.S. I am ….”

    “Our lives are based on what is reasonable and common sense;
    Truth is apt to be neither.”

    Christmas Humphreys

  103. Lavrenti Beria

    “I would give Ms. Warren a chance.”

    I’m about as prepared to give Elizabeth Warren a chance as I am to give the United States Congress or the White House a chance. And that’s no chance. Its time for a little elicir of demonstration or some eau de strike in my view. I don’t think anybody but the people ought to be given a chance.

  104. Re: @ Rickk___ “Dysfuctional Times calls for Unscrupulous Diviation’s” ie.) During the great depression the regional/community/local banks repurchased the mortgages from depressed homeowners knowing that the housing/job market would rebound (time tested cyclicality the norm, always!) eventually while agreeing to let them stay as contracted rent landowners (people were proud, so proud as to commit suicide than shame their name if defaulting) until they got back on their feet. Both sides won (not getting into it), but today it is grossly different with mountains of malfeasance (sadly overlooked by our faux`naif gov’t)piled-on insatiable avarice! Today the banks have ownership of prime property just sitting on the books for resale when the hour strikes twelve (?)- while using the balance sheet as a capital appreciation minus the opaque capital loss enhancing their (no big secret) bottom line. Yes indeed…the endless supply of fresh meat is infinite when you own the pasture land/feeding lots via the abattoir.

  105. NotBuffaloed

    Thank you for your response. Would you please tell us what actions should be taken and suggest a person to head up the new regulatory agency? It’s not enough to complain and negate something. Tell us what should be done in this case. Thanks!

  106. Anonymous quoted:

    “Our lives are based on what is reasonable and common sense;
    Truth is apt to be neither.”

    Christmas Humphreys

    http://en.wikipedia.org/wiki/Christmas_Humphreys
    *******************************************

    “The CIA owns everyone of any significance in the major media.”
    –former CIA Director William Colby
    *******************************************
    http://en.wikipedia.org/wiki/Petrodollar_warfare

    http://www.ratical.org/ratville/CAH/RRiraqWar.html#p0

  107. P.S.

    The Credit River Decision
    http://educationcenter2000.com/legal/credit_river_decision.htm

    An honest judge rules honestly on money matters.

    “A Minnesota Trial Court’s decision holding the Federal Reserve Act unconstitutional and VOID; holding the National Banking Act unconstitutional and VOID; declaring a mortgage acquired by the First National Bank of Montgomery, Minnesota in the regular course of its business, along with the foreclosure and the sheriff’s sale, to be VOID.”

  108. It’s a remarkably accurate assessment, hermanas. Not only have most Americans become obsolete, they have become
    irrelevant: Lumpenproletariat:

    It includes …chronic unemployed or unemployables, persons who have been cast out by industry, and all sorts of declassed, degraded or degenerated elements. In times of prolonged crisis (depression), innumerable young people also, who cannot find an opportunity to enter into the social organism as producers, are pushed into this limbo of the outcast. Here demagogues and fascists of various stripes find some area of the mass base in time of struggle and social breakdown, when the ranks of the Lumpenproletariat are enormously swelled by ruined and declassed elements from all layers of a society in decay.

    http://www.marxists.org/glossary/terms/l/u.htm

  109. “Jack Beauregard: Folks that throw dirt on you aren’t always trying to hurt you, and folks that pull you out of a jam aren’t always trying to help you. But the main point is when you’re up to your nose in sh*t, keep your mouth shut.”

    http://www.imdb.com/title/tt0070215/quotes?qt0246974

  110. Brad Thrasher

    rene,

    In First National v. Daly, the appellate court ruled that the Justice of the Peace, meaning municipal court judge at the time, lacked the judicial authority to rule as he did.

    In other words the court did not have jurisdiction over the constitutional issue Daly raised.

    I mentioned that I was initially sympathetic to Daly’s point. Upon further review, the issue is, do people have as a right of contract to accept federal reserve notes as lawful consideration and/or settlement of a debt?

    The answer, unequivocally and indisputably is yes we can.

    The legality of the Federal Reserve Bank issuing notes is not a constitutional question for our courts. It is however a policy question for the people and our elected representatives.

    On the policy issue I side with Andrew Jackson and Thomas Jefferson.

  111. @rene – Thanks for sharing this great piece of commentary from Russ.

  112. Let me add to the list the issue of our financial regulators being thick as a brick, and which you either completely forgot or conveniently ignored.

    All our financial regulators should have known that financial or bank crisis always occur because of excessive investment or lending to something thought as not being risky but which later turns out to be very risky… and that they never ever occur because of excessive lending to something perceived as risky.

    With that in mind imposing lower capital requirements for what is perceived as not being risky and higher capital requirements on what is perceived as risky is as dumb as dumb can be… as dumb as a handicap officer on the racetrack placing lower weights on the stronger horses and heavier weight on the weaker.

    Dumb, dumb, dumb regulators and dumb us for leaving them to regulate, digging us even deeper into the hole we’re in.

  113. Re: @ Per Kurowski____”Let me add to the list the issue of our financial regulators being thick as a brick”? You’ve got to stop making it so easy for me “Per” as your segue presages my (?) reality. I’m of course referring to “Jethro Tull” (Ian Anderson’s 1972-Aqualung Album) song: “Thick as a Brick” – “Your wise men don’t know how it feels to be thick as a brick”. PS. So impressed with group I named my second son Ian ;^)

  114. Not being and Englishman or a Scott, it was of course from Ian that I first learned about being “thick as a brick”

  115. Stephen A. Boyko

    @ Per Kurowski
    @ Bruce E. Woych

    “Dumb, dumb, dumb regulators and dumb us for leaving them to regulate, digging us even deeper into the hole we’re in.”

    Regulators are not dumb but are often:
    • Ill-suited, conventional folk who are honest but have difficulty when asked to think like a “crook,” and,
    • Ill-trained, deterministically trained accountants, lawyers, and economist who function well with routine audits but have difficulty when they must think in an indeterminate environment

    Excerpt from “We’re All Screwed” http://www.traderspress.com/detail.php?PKey=671

    Lessons learned: Policymakers’ 2-D remedies were slow to respond because they lacked the 3-D conceptual ability to tackle problems comprehensively. It is the difference between using maps and global positioning systems. Having GPS conceptual capability to govern-on-the-fly is a prerequisite for regulating global, robust markets. To illustrate, ProShares UltraShort Financials (symbol: SKF) are exchange-traded funds (ETFs) that correspond to twice (200%) the inverse (opposite) of the daily performance of the Dow Jones U.S. Financials. Yet what multi-dimensional governance alternatives were innovated to monitor SKF’s -200% impact?

    PS. Before you can think outside the box (3-D), you have to know whether you can think outside the square (2-D regulatory world). How do I know? I was a pretty-fair forensic accountant with a regulator (see: http://www.n2kecosystems.com/Management.aspx ).

    “All our financial regulators should have known that financial or bank crisis always occur because of excessive investment or lending to something thought as not being risky but which later turns out to be very risky…”

    No. They proved to be uncertain instruments that met the “uncertainty” bright-line tests of negative cash flow and mark-to-model valuations. Until you recognize and disclose the fundamental flaw in one-size-fits-all deterministic metrics to govern the entire scope of randomness, I fail to see the fairness in your “dumb” categorization. Now the efficacy of Basel is a different story.

    Excerpt from “We’re All Screwed” http://www.traderspress.com/detail.php?PKey=671

    Lessons remembered: It should be noted that whenever dealing in the realm of politics, historical context and logic are not necessary requirements. Given the negative publicity associated with no-money down, NINJA, and LIAR loans that essentially gave property rights to renters, it would seem likely that Congress would limit lending institutions from continuing these practices. Under the category of never missing an opportunity to miss an opportunity, Massachusetts Congressman Barney Frank is returning to the scene of the calamity—with taxpayer money of course. He and New York Representative Anthony Weiner have sent a letter to the heads of Fannie and Freddie exhorting them to lower lending standards for condo buyers.

    It helps to have a sense of humor

  116. “WHERE IS YOUR MONEY?” INFOGRAPHIC FOR POPULAR SCIENCE MAGAZINE

    “What’s not in your wallet is in a spreadsheet in what’s called a core data center, a massive concrete building full of servers. But really, says information-security executive John Meakin, “your money is everywhere.”

    http://funnelinc.org/funl_news_popsci_infographic.html

  117. So it seems.

  118. I hope you check in more often.

  119. Can the public inquire what they were thinking other than their tee times?

  120. Market Data Firm Spots the Tracks of Bizarre Robot Traders

    AUG 4 2010, 8:01 AM ET – The Atlantic

    “Mysterious and possibly nefarious trading algorithms are operating every minute of every day in the nation’s stock exchanges.

    What they do doesn’t show up in Google Finance, let alone in the pages of the Wall Street Journal. No one really knows how they operate or why. But over the past few weeks, Nanex, a data services firm has dragged some of the odder algorithm specimens into the light.

    The trading bots visualized in the stock charts in this story aren’t doing anything that could be construed to help the market. Unknown entities for unknown reasons are sending thousands of orders a second through the electronic stock exchanges with no intent to actually trade. Often, the buy or sell prices that they are offering are so far from the market price that there’s no way they’d ever be part of a trade. The bots sketch out odd patterns with their orders, leaving patterns in the data that are largely invisible to market participants.

    It’s thanks to Nanex, the data services firm, that we know what their handiwork looks like at all. In the aftermath of the May 6 “flash crash,” which saw the Dow plunge nearly 1,000 points in just a few minutes, the company spent weeks digging into their market recordings, replaying the day’s trades and trying to understand what happened. Most stock charts show, at best, detail down to the one-minute scale, but Nanex’s data shows much finer slices of time. The company’s software engineer Jeffrey Donovan stared and stared at the data. He began to think that he could see odd patterns emerge from the numbers. He had a hunch that if he plotted the action around a stock sequentially at the millisecond range, he’d find something. When he tried it, he was blown away by the pattern. He called it “The Knife.” This is what he saw: ….

    “When I pulled up that first chart, we saw ‘the knife,’ we said, that’s certainly algorithmic and that is weird. We continued to refine our software, honing the algorithms we use to find this stuff,” Donovan told me. Now that he knows where and how to look, he could spend all day for weeks just picking out these patterns in the market data. The examples that he posts online are just the ones that look the most interesting, but at any given moment, some kind of bot is making moves like this in the stock exchange.

    “We probably get 10 stocks in any 10 minutes where we see something like this,” Donovan said. “It’s happening all the time.”

    These odd bots don’t really make sense within the normal parameters of the high-frequency trading business. High-frequency traders do employ algorithms to look for patterns in the market and exploit them, but their goal is making winning trades, not simply sending quotes into the financial ether.

    …the algorithms we see at work here are different. They don’t serve any function in the market. University of Pennsylvania finance professor, Michael Kearns, a specialist in algorithmic trading, called the patterns “curious,” and noted that it wasn’t immediately apparent what such order placement strategies might do.

    “They are moving the high-frequency services as close to the exchanges as possible because even the speed of light matters,” in such a competitive market, said Stanford finance professor Peter Hansen.

    But already since the May event, Nanex’s monitoring turned up another potentially disastrous situation. On July 16 in a quiet hour before the market opened, suddenly they saw a huge spike in bandwidth. When they looked at the data, they found that 84,000 quotes for each of 300 stocks had been made in under 20 seconds.

    “This all happened pre-market when volume is low, but if this kind of burst had come in at a time when we were getting hit hardest, I guarantee it would have caused delays in the [central quotation system],” Donovan said. That, in turn, could have become one of those dominoes that always seem to present themselves whenever there is a catastrophic failure of a complex system.

    “Who looks at millisecond charts?” Donovan said. “You’d never see those patterns in any other fashion. The SEC and CFTC certainly weren’t.”

    http://www.theatlantic.com/science/archive/2010/08/market-data-firm-spots-the-tracks-of-bizarre-robot-traders/60829/

  121. Stephen A. Boyko, you write that you “fail to see the fairness in [my] “dumb” categorization of the regulators because they used “uncertain instruments that met the “uncertainty” bright-line tests of negative cash flow and mark-to-model valuations”

    Let me ask you then… can you provide me with just one single example of a financial crisis that has originated from excessive lending or investment in what was considered as “risky”? Hey I even argue that the Dutch tulips would have had an AAA rating during their heydays.

    Any regulator who does not know that the prime risk lies always in what is perceived as not being risky but can turn out to be very risky, and allow themselves to be convinced by the bankers to give them special incentives to invest or lend to what is perceived as not being risky are plain stupid or in other words “thick as a brick” … just as all those who allow the “thick as a brick” regulators keep un regulating.

    This does of course not mean that I do not completely share your objection against “one-size-fits-all deterministic metrics to govern the entire scope of randomness”. I do! And I have written against it since 1997 and early Basel I days.

  122. Stephen A. Boyko

    @ Per Kurowski

    Granted when forced to choose between “cupidity” and “stupidity,” the latter prevails. Rather than spend a lot of time in nitpicking, would you accept limited or constrained as a compromise? But that misses the point of “why” and brings us back to the classroom segmentation of “C,” “B,” and “A” students with:

    • “C” students truncating their analysis with an answer i.e., “Banksters,”
    • “B” students providing a rationale for their answer i.e., political moral imperative of “good vs. evil” (Clint Eastwood will turn this into a movie one day), and
    • “A” students seeking causality of “why.”

    I argue here and in other blogs that the Subprime Crash was attributable to the combination of conflations of “risk vs. uncertainty” for the financial portion of the economy and “owner vs. renter” for the real goods and service portion of the economy.

    Excerpted from: Dodd-Frank: A fine alphabet soup appetizer, but where’s the beef?

    http://readingthemarkets.blogspot.com/2010/07/dodd-frank-fine-alphabet-soup-appetizer.html

    “Difficulties arise when risk is conflated with uncertainty under deterministic, one-size-fits-all governance metrics that frustrate the market’s price discovery function. We can insure (put options) and hedge (Ford and Exxon) risk. We can insure (natural disaster insurance) uncertainty, but we cannot hedge (Ford and pork bellies) uncertainty. If we cannot hedge, we cannot regulate risk and uncertainty in a one-size-fits-all regime due to non-correlative information. It is similar to having a single thermostat regulate temperature for H2O conditions of ice, water, and steam. Investments that lack cash flow and are valued on a mark-to-model basis are uncertain. Credit default swaps (CDSs) are uncertain derivatives that required constant hedging by dealers. This activity resulted in cost with very little benefit. Absent randomness segmentation, indeterminate information cannot be processed effectively and efficiently by determinate regulatory metrics.

    Dr. Stanley Liebowitz of the University of Texas posited that the single most important factor in home foreclosures was negative equity. No-money-down, liar loans effectively gave property rights to renters. This created a moral hazard where investor rights exceeded their responsibilities. Liebowitz demonstrated that the presence of such loans also misdirected policymakers’ focus toward the wrong variables for controlling the adverse consequences of the subprime crash.”

    Whether the above is correct or not remains to be seen, but I am reasonably convinced that the one-size-fits-all the capital market system is broken and requires fundamental structural repair. But rather than define Dodd-Frank’s regulatory linchpin, “systemic risk,” all hope now rests with the Anti-Bankster, Ms. Warren. Follow that yellow brick road Scarecrow, we will find you a brain.

  123. Goldman Made Between $11 And $16 Billion In 2009 Trading CDS And Other Derivatives ($49-Trillion)

    08/07/2010 – Tyler Durden – Zerohedge

    “As part of its most recent FCIC grilling, David Viniar left the political theater a month ago with a homework assignment to disclose all of the firm’s derivative profits, as well as provide granular detail on its derivative trades. Today, courtesy of a memo from Goldman intercepted by the WSJ, we now know that derivative trades accounted for between 25% and 35% of 2009 revenue. “Based on the percentages provided by Goldman, such businesses generated $11.3 billion to $15.9 billion of the company’s $45.17 billion in net revenue for 2009.”

    As a reminder, the Office of the Currency Comptroller noted (table 2) Goldman had $49 trillion in total derivatives as of Q1.

    However, the bulk of the profit comes from trading credit derivatives where Goldman, post the assimilation of Bear and Lehman into the collective, is now virtually an undisputed trading powerhouse, and due to the OTC nature of the product allowing firms to set bids and asks as is, as long as liquidity in cash products continues to decline, Goldman will continue to dominate not only the most profitable vertical of derivative trading, but CDS will continue to generate roughly a third of the firm’s profits, for both flow and prop.”

    http://tinyurl.com/366p9g9

  124. Re: @ Per Kurowski___Quote: Joseph Campbell (3-26-1904/10-30-1987) “Is the system going to flatten you out and deny you your humanity, or are you going to be able to make use of the system to the attainment of human purposes?”…Fini___ref: http://www.youtube.com/watch?v=FWXB9XuSq5W___scroll down Part 1 – 7/31/1976 – Tampa,Fl. PS. Basel is “Not” a deity – rather a delegation of oppression!

  125. I’m thinking what Per Kurowski is saying is analogous to that Minneapolis Bridge Collapse. It was assumed to be save, ie. no warnings. Like the rest of America’s infrastucture.

  126. Is it worse to watch your family blown up to watching them starve?

  127. Who Is buying Stocks – In The Face Of Massive Redemptions ?

    08/08/2010 – Zerohedge – excerpts

    “One of Zero Hedge’s favorite indications of rationality (in addition to following what credit does, without fail to the chagrin of permabullish equity fanatics) in the face of Fed-induced capital markets psychopathology, is following the flow of funds into various asset categories.

    Last week we pointed out that ICI reported the 13th sequential outflow from domestic equity mutual funds, validating our persistent skepticism that the money pushing stocks higher on margin is certainly not coming courtesy of retail accounts, which represent the bulk of holders behind the $10 trillion market cap of US stocks. Incidentally the retail redemptions are also occurring at the ETF level, and in total now amount to $32 billion for mutual funds, and $6 billion for ETFs.

    The paradox of a rising stock market in the face of massive redemptions has forced others, namely BNY ConvergEx’ Nicolas Colas to ask the same question: “If retail investors are leaving U.S. stocks in both 401(k)s (read mutual funds) and brokerage IRAs/investment accounts (read ETFs), then who is buying stocks so that the market is still up (modestly) on the year?

    In this environment, we believe that in addition to the recently floated idea of annuitizing 401(k), a new revision to retirement planning will be made to allocated even more capital to the equity portion of 401(k) plans, now that the Fed is about to imminently get back to monetizing treasuries thereby making the question of just who buys Treasurys on margin moot.”

    http://www.zerohedge.com/

  128. If you ‘follow the money’ you will see that for a long time now the real lobbying money has been spent at the rules-writing regulatory agencies. Perhaps our version of the Japanese Iron Rice Bowl. It’s a complicated issue that politicians, the media, and the voters can’t or won’t follow.
    Why don’t we just set the financial system up so that certain basic investments-mortgages, etc for banks is ok and covered by the government. And counts towards their capital. Anything else, they can do if they want. Its on their dime. Its uninsured by the Feds and doesn’t count as capital. The stockholders of the bank hold all the risk. Maybe the end of moral hazard? And it can be simple and basic so the quants and their ilk won’t be figuring a way around the regulations before they are even written.

  129. Stephen A. Boyko

    Follow the randomness to find the profit incentives.

    “We’re All Screwed: How Toxic Regulation Will Crush the Free Market System”

    http://w-apublishing.com/Shop/BookDetail.aspx?ID=D6575146-0B97-40A1-BFF7-1CD340424361

    advocates a similar strategy differently. Markets are complex, adaptive systems with dynamic, nonlinear properties. If there is complexity, there is uncertainty.

    You cannot govern uncertainty with the same metrics and mind-set that you use to govern risk. Most would agree that Citi’s failed financial supermarket concept was flawed. If you cannot cross-sell, you cannot cross regulate—non-correlative information problem. For effective and efficient governance, you need to segment regulation into predictable, probabilistic, and uncertain regimes that correlate with the randomness of the underlying economic environment.

  130. But there are also very simple almost linear realities that should nonetheless not be ignored.

    If a bank was making .5 percent spread on Greek debt or triple-A rated private debt then if their capital requirement was 8 percent and they could therefore leverage 12.5 to 1 they would be earning 6.25 percent on their capital, nothing shabby but nothing to write home about.

    But if then the regulators on that same paper, in the name of safeguarding the society, allowed the banks those same operation with only 1.6 percent in capital, which implies a leverage of 62.5 to 1 then those same .5 percent margins would result into 31.25 percent on bank capital, definitively something to write home about, especially about the big bonuses that resulted, courtesy of the regulators in the Basel Committee… gotta love them!

  131. Stephen A. Boyko

    Messr Swanson and Kurowski

    Per your making my point, it is the randomness (TRTR), as defined in terms predictability, probability, and uncertainty that matters more than TBTF scale. The key is determining the bright lines that separate the definitional properties of randomness.

    As stated to Mr. Swanson above “Follow the randomness to find the profit incentives” and as you (Per) have illustrated quantitatively. I believe that the 3 of us are making similar statements differently.

  132. I am not sure I follow you completely on the “randomness” part. As I see it there is no randomness involved in that bank crisis and financial crisis will always start in what is perceived as the less risky part of the economy… and never ever where the risks are perceived to be and so the only randomness I can think of is that which got us the thick-as-a-brick regulators who thought they had to give incentives to the banks to go to the “safe” areas.

  133. Stephen A. Boyko

    @ Per

    PK: “I am not sure I follow you completely on the “randomness” part.”

    SAB: randomness is comprised of three components:

    1. Predictable investments: valuation is formulaically determined,
    2. Probabilistic investments: valuation is determined by range of expected values, and
    3. Uncertain investments: that lack positive cash flow and are marked-to-model.

    PK: “no randomness involved in that bank crisis”

    SAB: How can you have randomness when there were no alternatives to the legacy one-size-fits-all regulatory metrics? What I argue for is the tripartite categorization to better correlate data with the underlying economic environment.

    Recall the S&L meltdown, where the indeterminate “asset” on the books of many insolvent S&Ls was “regulatory goodwill” – the regulator’s reward for acquiring an even more insolvent thrift. Who could have foreseen the Resolution Trust Corporation’s (RTC) liquidations that occurred when minimum reserve requirements became illusory in a setting where capital consisted of vapor assets? Ergo “randomness” from forecasted regulatory capital.

    Likewise with the subprime crash, Dr. Stanley Liebowitz of the University of Texas posited that the single most important factor in home foreclosures was negative equity. No-money-down, liar loans effectively gave property rights to renters. This created a moral hazard where investor rights exceeded their responsibilities. Liebowitz demonstrated that the presence of such loans also misdirected policymakers’ focus toward the wrong variables for controlling the adverse consequences of the subprime crash. No-money-down, liar loans that went upside down became uncertain investments that resulted in cash flows that were received randomly from projected cash flows.

    What needs to take place is to “back-test” subprime cash flows with predictable, probable, and uncertain categories.

    Look forward to your comments.

  134. You write: “Dr. Stanley Liebowitz of the University of Texas posited the single most important factor in home foreclosures was negative equity” A nonsensical truism! It is like saying that the single most important factor in the death of someone, after you took away the food from him, was his initial malnourishment.

    There would have been no “no equity down” or liar mortgages, NOT ONE SINGLE DOLLAR, had it not been for the possibility of getting a good rating on securities backed by these mortgages, so as to unload them on the market, immediately… and by the way this is no chicken or the egg question.

    You also write “What needs to take place is to “back-test” subprime cash flows with predictable, probable, and uncertain categories.” And I ask… in order to exactly achieve what? That the capital requirements are to be a more precise regressive discrimination against the risk of default? What if I were to tell you that defaults are not a bad thing! That plenty of defaults are needed in order to take us forward?

    You have been arguing for quite some time that we express different sides of the same coin… and I am not so sure about that… so let me ask you a very concise question. Do you believe that lending to small businesses and entrepreneurs, just because they are riskier, should generate higher capital requirements for banks than lending to CORRECTLY rated triple-A rated companies?

  135. Stephen A. Boyko

    @ Per

    As stated earlier in the post, “randomness of capital” is similar to H2O conditions of ice, water, and steam. Investments that lack cash flow and are valued on a mark-to-model basis are uncertain. This is not a linear function of risk.

    Complexity begets uncertainty that can neither be valued nor governed by a one-size-fits-all regime. “Uncertainty” is different from, not a higher form of “risk.”

    Indeterminate information is non-correlative to determinate information and subject to category errors with the underlying economic environment. By stretching causality, you are making a similar mistake to the Basel regulators. When different functions (risk and uncertainty) are treated as though they were the same, error is likely.

    “Do you believe that lending to small businesses and entrepreneurs, just because they are riskier”

    No because they are “UNCERTAIN.”

    It is why VCs look for 35%-plus from their successful investments. Conflating uncertainty with risk enabled the so-called “banksters” to play VC with depositor insured funds. Requiring no-money down, liar loan to be disclosed to be uncertain (vs. risky) should have held such loans to different valuation and governance metrics. One-size-fits-all, deterministic metrics gave the “banksters” a free-ride. TBTF repeats the mistake.

  136. Ok we absolutely do not think the same!

    From you answer I believe that you hold “that lending to small businesses and entrepreneurs, just because they are “uncertain”, SHOULD generate higher capital requirements for banks than lending to CORRECTLY rated triple-A rated companies”

    I hold that the market already takes care of that by means of charging its risk-premiums, and that consequentially we should NOT have higher capital requirements for small businesses and entrepreneurs for two reasons:

    1. Even though they might and probably are more risky or uncertain we need the banks to finance them more since they have little alternative access to the capital markets.

    2. Just because they are perceived as risky or uncertain they do not pose a systemic risk since the system is sufficiently coward to take care of that. The dangers of the banking system is always to be found in the excessive financing of what is not perceived as risky.

  137. Stephen A. Boyko

    @Per

    Let’s address the twoi reasons first.

    1. Even though they might and probably are more risky or uncertain we need the banks to finance them more since they have little alternative access to the capital markets.

    SAB: Agreed! That was advocated in the “Entrepreneur Exchange” in the 2004 SEC Small Business Conference paper “Small is Beautiful”, The National Interest, No. 77 – Fall 2004. http://www.findarticles.com/p/articles/mi_m2751/is_77/ai_n6353167/print . Thereafter the paper was circulated via USAID economic development offices.

    2. Just because they are perceived as risky or uncertain they do not pose a systemic risk since the system is sufficiently coward to take care of that. The dangers of the banking system is always to be found in the excessive financing of what is not perceived as risky.

    SAB: Not segmenting the three states of randomness contributes to “excessive financing of what is not perceived as risky.” This gave the “banksters” a free-ride to be wolves in sheeps’ clothing.

  138. Let me understand you better. You hold that you can ex-ante separate perfectly separate a risk in the 3 categories of:

    1. Predictable investments: valuation is formulaically determined
    2. Probabilistic investments: valuation is determined by range of expected values, and
    3. Uncertain investments

    And that from there you would be able to determine the perfect capital requirements… for whatever purpose.

    Are we to have a predictable rating, a probabilistic rating, and an uncertain rating? That would really be a show!

    I am beginning to have an inkling I would not like to see you in Basel since it sort of seems to me you might be digging us even deeper in the hole… though I readily admit of course that there are some elements of your thinking that I might not understand yet… or never.

  139. Stephen A. Boyko

    @Per

    The information response (scatter diagram) for each of the three categories is better correlated (more efficient market) than the information response for the universe as a whole (global capital market). You cannot govern determinate and indeterminate underlying economic environments with legacy one-size-fits-all regulatory metrics (Citi example of cross-selling and cross-regulating).

  140. You write: “The information response (scatter diagram) for each of the three categories is better correlated (more efficient market) than the information response for the universe as a whole (global capital market).”

    So please be my guest and use that knowledge in your own investment endeavours, but, if what it leads you to, is to believe yourself a better substitute for the markets than the current regulators think themselves to be, then our roads part… because that is exactly what I mean by dangerous schemers digging us even deeper in the hole we’re in.

    By the way I do not mind regulators using that knowledge supervising the market, what I do mind is regulators interfering in the markets… c’est pas du tout la même chose!

  141. Stephen A. Boyko

    @ Per

    “what I do mind is regulators interfering in the markets”

    But that is exactly what one-size-fits-all regulation does. It is disproportionately biased against uncertain no-money down, NINJA securitized mortgages.

    Consider the different effect whether a tax break is capital gains or income. No-money down, NINJA securitized mortgages benefit more from a capital gains tax break than conventional mortgages. This should be reflected in the capital requirement supporting such securities. One-size regs frustrate the pricing system relative to that market reality.

    You want to clear the housing backlog, drop the capital gains and mortgage interest rates, and accelerate depreciation schedule for rental property. Require transparency as to securitizing the underlying economic uncertainty and rental property management would boom along with related employment.